Virgin changes tack to tackle Qantas

Virgin
Australia has shelved plans to start flights between Brisbane and Abu Dhabi, the hub of its alliance partner Etihad Airways, as it preserves capital for a fight closer to home against
Qantas
.

Virgin, which previously said it would operate three flights a week between Brisbane and Abu Dhabi by February, has decided not to exercise a purchase option on a sixth Boeing 777 – the jumbo that it flies to Abu Dhabi and Los Angeles.

The airline would have to buy or lease another wide-body aircraft or remove one from service on the Los Angeles route to meet the commitment to Etihad – options that are not under consideration, sources say.

It is understood Virgin has no plans to add another 777 to its fleet and will not contemplate pulling aircraft off the profitable trans-Pacific services, so it will not be starting the slated Brisbane service in the ­forseeable future.

Virgin chief
John Borghetti
has said he favours the flexibility of Airbus’s A330, which can be used on domestic or medium-haul routes. The option for a sixth 777 was put in place before he joined the airline.

The Boeing 777-300ER (extended range) aircraft flown by Virgin Australia sells for about $US300 million, while the A330-300 costs about $US222.5 million.

Virgin’s move to focus its efforts and resources on the trans-Pacific, trans-Tasman and domestic market comes after industrial relations action at rival Qantas boosted passenger loads in recent months.

The delay in adding more capacity to Abu Dhabi is unlikely to sit well with Etihad, which had been waiting for the Brisbane flights to take its own offering out of the Queensland city to a daily service.

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“No final decision has been made on the Brisbane to Abu Dhabi route,’’ said Virgin spokeswoman Danielle Keighery. “However, we will continue to monitor the market."

Irrespective of Virgin’s plans, it is understood Etihad intends to offer daily services out of Brisbane.

Missing the February launch date in Brisbane is the first noticeable glitch in Mr Borghetti’s rapid strategic overhaul of the airline. Product and brand changes, including a nationwide revamp of airport lounges and aircraft interiors, have progressed on or ahead of schedule.

In addition to the Etihad tie-up, ­Virgin has forged strategic alliances with premium carriers including Air New Zealand to serve the trans-Tasman route, Delta for the trans-Pacific and US domestic routes and Singapore Airlines for Asia.

The Etihad link in Mr Borghetti’s “virtual international network" was primarily to serve London and Europe – where travel demand has been hit by economic turmoil.

Analysts in Virgin’s home market have raised earnings targets for this year and beyond in recognition of the extra business won in the short and medium term during months of strikes at Qantas and the two-day grounding of its entire fleet.

Merrill Lynch raised its estimate for 2012 underlying profit before tax by 52 per cent to $90 million, and its 2013 estimate by 12 per cent, citing higher passenger volumes and yields from winning more of the lucrative domestic business market.

“Qantas’s pain is Virgin’s gain," said Merrill analysts led by Matthew Spence.

“While still early in their campaign to win a greater share of corporate revenue, Virgin appears to be gaining some traction."

JPMorgan raised its 2012 earnings per share estimate by 54 per cent, saying in a note last week that stronger passenger loads are “likely to continue for the remainder" of the first half.

“However, retaining corporate segment share at current levels may be challenging longer term given Qantas’s network advantage," said JPMorgan analyst Scott Carroll.

JPMorgan said international loads at Virgin of 82.2 per cent in September suggested the airline’s long-haul operations were performing well, with loads to Abu Dhabi tracking towards the 80 per cent target most airlines consider the benchmark for profitable routes.